Enhancing the Amenities of Work in the Face of Real Wage Losses
CommentZEW Economist Friedhelm Pfeiffer on Falling Real Wage Incomes despite Labour Shortages
Despite economic stagnation, the workforce has expanded by a remarkable 700,000 since 2020. Moreover, real incomes have taken a downward plunge even though the demand for labour surged. Dr. Friedhelm Pfeiffer, deputy head of the “Labour Markets and Social Insurance” Unit at ZEW Mannheim, explores these dynamics, shedding light on potential strategies to enhance the attractiveness of work in the face of persistent real wage losses and the demand for skilled workers during this time of stagflation.
Presently, the labour market witnesses a convergence of several factors that interact in unique ways. The reverberations from the energy price shock triggered by the war in Ukraine still linger, while real economic output is stagnating in the face of persistent high inflation. This in itself causes a dip in firms’ demand for labour. At the same time, businesses report ongoing difficulties in finding enough skilled experts capable of managing the green and digital transformation, all while preparing for the impending wave of retirements among the baby boomer generation.
Moreover, real incomes for workers fell by an average of four per cent between 2021 and 2022, and from Q1 2022 to Q1 2023, incomes experienced an additional 2.3 per cent decline, according to the German Federal Statistical Office. Notably, even robust contractual nominal wage increases of 5.6 per cent during the same period have failed to counterbalance the relentless inflationary pressures. In this context, falling real wages in themselves also reduce firms’ real labour costs, which leads to a rise in corporate labour demand. In fact, the first quarter of 2023 saw employment figures of about 41.7 million individuals, an increase of 700,000 compared to the same period in 2020, despite the challenges posed by skill shortages and economic stagnation.
Thus, the question emerges: how can the allure of work be improved amidst persistent real wage losses and the demand for skilled workers, all within the backdrop of stagflation? As things stand, bargaining partners in the labour landscape struggle to raise nominal wages sufficiently to offset the impacts of inflation. At this juncture, policymakers and industry leaders have several alternatives to secure the talent pool, of which two will be scrutinised more closely.
Rediscovering non-monetary compensation components
One might wonder why workers haven’t mounted a stronger resistance against the reduction in real wages, or why it didn’t push back more forcefully, especially in light of the demand for skilled workers. One cannot exclude the possibility that their bargaining power has diminished. However, the reason could also lie in nominal wage rigidities, signifying inflexibility in wage adjustments, which hinder substantial increases in nominal wages. Nominal wages display a certain rigidity in the ebb and flow of the economy. Consequently, they might only be partially suitable for maintaining a steady equilibrium between supply and demand on the labour market.
Furthermore, it is equally plausible that many workers have come to value the work-from-home arrangements enforced during the pandemic. Those who no longer have to be physically present at the workplace every day reap savings in commuting costs and time. While remote work might not be universally feasible, the pandemic may have played a role in prompting both workers and firms to rediscover the worth of non-monetary compensation components, alongside the monetary ones.
Companies possess an array of non-monetary compensation components at their disposal that they can enhance in order to attract skilled personnel despite real wage reductions amidst nominal rigidities. They could foster improved health and individual customisation options in the workplace and enhance amenities for job seekers and workers alike by cultivating a transparent and respect-based corporate culture. The author’s assessment suggests that non-monetary compensation components are presently being embraced by many workers, much like wage increases.
Several policy options
Furthermore, economic policy has a set of options to support the economy in its quest for skilled workers, especially when nominal monetary wages before taxes fall short of fulfilling their equilibrium function. One option involves the reduction of the tax burden on labour. Currently, this burden increases notably within the middle-income brackets, with adverse repercussions for the labour supply. Tax cuts, under otherwise unchanged conditions, augment net wages and disposable incomes and likely stimulate labour supply within wage-sensitive segments.
Admittedly, the wage elasticity of labour supply is relatively low among individuals aged between 30 and 50, and in certain high-income labour markets segments, it might even be negative. Consequently, a higher net wage might either have no impact on desired working hours or even a negative one. Elevating net wages within the middle-income groups, where wage elasticity should predominantly remain positive among younger and older workers, could indeed be helpful to increase labour supply within these groups.
